Additional Resources

Company

What goes in vs. what comes out

Back in 2004, I wrote about a new book at the time titled “What if Boomers Can’t Retire?” by Thornton Parker. It offered a shot across the bow for those saving for retirement by offering a warning regarding the ephemeral nature of stock market values.

Those of us depending on what Parker called “phantom wealth” were given a “heads-up” in the form of a clear, concise explanatory jewel as to how stock prices can fail to represent true intrinsic value of the companies they represent. Bear in mind, this was just a few years after the 2000 implosion of the market that was triggered by the dot-com bust. So investors had just experienced, in real time, the phenomenon of phantom wealth.

Fast forward to the Jan. 17 Wall Street Journal article’s blaring headline, “Boomers to Start Mandatory 401(k) Exit.” This article was prompted by recent statistics showing that the net inflow of money contributed to 401(k) plans is now less than the amount being distributed. Parker’s book made the point that this would be the beginning of the end for retirement nest eggs because the demand for purchasing shares would be less than the supply available for sale. Thanks to the laws of supply and demand, the price of shares would plummet as a result.

The WSJ article implied that so-called “required minimum distributions” for anyone age 70½ or older (initially about 3.6 percent of their account balance, per year) will have the unintended consequence of causing stock prices and financial industry profits to begin a long downward spiral. This was the contention of Parker’s book as well.

Well, it’s more complicated than that. First, there is the remaining money continuing to grow, including dividends on stocks and interest on bonds, both automatically reinvested. On $25 trillion in retirement plans, these earnings dwarf the net amount of departing money not offset by what is still a lot of new money contributed by those coming up behind the boomers — those born during the 18-year span starting in 1946.

Next, there is no law saying the distributions can’t be reinvested back in the market. Because not all distributions are required for “walking-around-money” on the part of retirees, much of this money winds up becoming after-tax investments. It just transforms from “tax deferred” to “after tax” and is therefore returning to the market to help maintain the demand that offsets supply.

To review the math itself, the Wall Street Journal points out that the net flow as of the latest figure available (2014) was $25 billion. This is two-tenths of 1 percent of the estimated $15 trillion in company plans alone (a figure that does not include rollover IRAs.) Meanwhile, the assets continuing to earn something like 7 percent per year in a 50-50 mix of stocks and bonds would be generating about $1.7 trillion. I don’t see a need to get all worked up.

The Journal article states that millennials coming up represent an even larger demographic than the actual number of boomers today, so that should offset concerns raised by boomers bailing out.

The net effect of similar articles is that they can set up a perception on the part of investors that trouble may be on the way. And this leads us to Parker’s central premise — that the stock market reflects phantom values that can fluctuate dramatically, based on investor perception of what stocks in general may be worth just around the corner.

As Warren Buffett contends, the market is a “voting machine” that can easily become disconnected from the intrinsic value of our combined public companies that make steady profits. Currently, those happen to be record profits, so let’s hope we don’t allow the turbulence in Washington to mess with a good thing.

Get weekly articles delivered to your inbox!

* indicates required

Email Address *

First Name

Last Name

Is this content useful?

As an independent employee retirement and benefits firm with deep plan expertise and experience, Pension Dynamics is uniquely qualified to design and administer your employee retirement and benefit plan.